Orig­i­na­tion

Tra­di­tional mort­gage de­nial met­rics, based on analy­ses of Home Mort­gage Dis­clo­sure Act data, may not ac­cu­rately de­pict de­nial rates be­cause they fail to ac­count for con­sumer cred­it­wor­thi­ness.

HMDA de­nials don’t tell the whole story about mort­gage dis­crim­i­na­tion

Racial and eth­nic dis­crim­i­na­tion in mort­gage lend­ing may be mis­rep­re­sented by flawed de­nial met­rics that sug­gest a larger gap be­tween white and black and His­panic de­nial rates than what ac­tu­ally ex­ists, ac­cord­ing to the Ur­ban In­sti­tute.

Tra­di­tional mort­gage de­nial met­rics, based on analy­ses of Home Mort­gage Dis­clo­sure Act data, may not ac­cu­rately de­pict de­nial rates be­cause they fail to ac­count for con­sumer cred­it­wor­thi­ness. Be­cause the met­rics can­not main­tain that equally qual­i­fied bor­row­ers of vary­ing back­grounds are be­ing treated dif­fer­ently, they can’t be trusted as ev­i­dence of dis­crim­i­na­tion, Ur­ban In­sti­tute re­searchers Lau­rie Good­man and Bing Bai wrote in a re­cent re­port.

The ob­served de­nial rate, which is the tra­di­tional method used for mea­sur­ing mort­gage de­nial rates, di­vides the num­ber of de­nied ap­pli­cants by the to­tal num­ber of mort­gage ap­pli­ca­tions. Ac­cord­ing to this method, the mort­gage de­nial rate for black fam­i­lies is dou­ble that of whites.

Us­ing its own method, called the “real de­nial rate,” the Ur­ban In­sti­tute de­ter­mined that the dif­fer­ence in de­nial rates be­tween the two races was not as “alarm­ingly high” as the ob­served de­nial rate met­ric por­trayed it to be.

“Prov­ing the pres­ence or ab­sence of dis­crim­i­na­tion is dif­fi­cult, but us­ing the ob­served de­nial rate as a mea­sure of dis­crim­i­na­tion is mislead­ing. The real de­nial rate, though it has lim­i­ta­tions of its own, paints a clearer pic­ture and high­lights the need for greater ex­plo­ration of the large dif­fer­ences in credit pro­files among dif­fer­ent racial and eth­nic groups,” said an Ur­ban In­sti­tute re­port.

The or­ga­ni­za­tion’s method sep­a­rates owner-oc­cu­pied pur­chase bor­row­ers into two groups — higher credit pro­file ap­pli­cants (strong can­di­dates with vir­tu­ally no chance of de­nial) and lower credit pro­file ap­pli­cants (weaker can­di­dates with some chance of de­nial) — and then com­pares the num­ber of de­nials to the num­ber of lower credit pro­file ap­pli­cants, ac­cord­ing to the or­ga­ni­za­tion.

Putting the meth­ods to the test, ob­served de­nial rates for black house­holds are 2 times that of whites, 1.4 times that of His­pan­ics and 1.2 times that of Asians, while real de­nial rates sug­gest the de­nial rate for blacks is only 1.2 times that of whites, and 1.1 and 1.4 times that of His­pan­ics and Asians, re­spec­tively.

While dif­fer­ences still ex­ist be­tween races, the gaps are con­sid­er­ably smaller, which can help pol­i­cy­mak­ers more bet­ter con­front is­sues in the in­dus­try.

“Mort­gage dis­crim­i­na­tion shown by the real de­nial rate arms pol­i­cy­mak­ers with a more ac­cu­rate and pow­er­ful tool to un­der­stand and ad­dress cur­rent prob­lems in the hous­ing mar­ket,” ac­cord­ing to the Ur­ban In­sti­tute.

The black home­own­er­ship rate has dropped more than any other group since 2001, fall­ing 5% com­pared to 1% for whites. The home­own­er­ship rate has since grown for His­pan­ics.

The Ur­ban In­sti­tute’s anal­y­sis il­lus­trates “how the gen­er­ally lower credit scores among blacks and His­pan­ics bor­row­ers is a sig­nif­i­cant fac­tor in their higher de­nial rates. Pol­icy so­lu­tions need to fo­cus on this dis­par­ity,” ac­cord­ing to the or­ga­ni­za­tion.

While the Ur­ban In­sti­tute’s method helps ac­count for ap­pli­cant cred­it­wor­thi­ness, it still re­quires the sim­pli­fi­ca­tion of com­plex data and trends; it an­a­lyzes credit scores, loan-to-value ra­tios, debt-to-in­come ra­tios and prod­uct and doc­u­men­ta­tion types, but does not con­sider in­come or in­come vari­abil­ity be­cause the or­ga­ni­za­tion only has ac­cess to DTI.